Restraints of trade in Commercial documents must be reasonable

Commercial contracts frequently contain restraints of trade designed to protect the interests of one of the parties.

The validity of those restraints depend upon a wide range of factors.

Recently-those factors were examined in Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178.

In this case, the parties had previously been in a commercial  agreement involving the sale of flowers at the Flemington markets,

including south American flowers.

They agreed to divide up the business between them and entered into an agreement which contained a restraint provision.

The restraint provision prohibited Vinflora from importing flowers from South America and displaying such flowers on its stands. It also provided that Vinflora could only purchase South American flowers from Belflora, and only to fulfil orders, with the profit to be shared. Belflora was subject to the same restraints in relation to Kenyan flowers.

In the first instance, the trial judge concluded that a restraint provision in an agreement between Belflora and the first respondent, Vinflora Pty Ltd (Vinflora), (the Agreement) was void as an unreasonable restraint of trade. As a consequence, the primary judge dismissed Belflora’s claim for injunctive relief, seeking to restrain Vinflora and the second respondent, Mr Vamsi Nagendra Babu Uppalapti (Mr Uppalapti), from displaying and selling South American flowers in contravention of the restraint clause.

The Court unanimously dismissed the Appeal.

The main issue on appeal was whether the restraint provision in the Agreement was void as an unreasonable restraint of trade.

Belflora argued that the primary judge erred in failing to apply s 4(1) of the Restraints of Trade Act 1976 (NSW) in determining whether the restraint was enforceable by Belflora.

Belflora argued that had the primary judge applied that section, his Honour would have upheld the restraint as being a valid restraint of trade as it was not against public policy.

Factors for Consideration

Was the restraint provision in the Agreement void as an unreasonable restraint of trade?

1. The restraint provision was contrary to public policy and void as an unreasonable restraint of trade:
2. The question of whether there is a “restraint” is to be answered having regard to the practical working of the alleged restraint: [Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2002) 210 CLR 181; [2001] HCA 70, referred to.
3. The restraint plainly operates as a vertical and a horizontal restraint of trade: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2002) 210 CLR 181, referred to.
4. At common law, a restraint of trade is contrary to public policy and void unless it is reasonably necessary to protect the interests of the parties and is reasonable in the interests of the public: Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; [1973] HCA 40; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45; Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 164, referred to.
5. Pursuant to s 4(1) of the Restraints of Trade Act, a restraint is valid to the extent to which it is not against public policy, even if not in severable terms: Orton v Melman [1981] 1 NSWLR 583; Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 164; Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, referred to.
6. A mere restraint against competition per se is unenforceable: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; [1973] HCA 40; Tullett Prebon (Australia) Pty Ltd v Purcell (2008) 175 IR 414; [2008] NSWSC 852; Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, referred to.
7. A restraint directed to preserving or maintaining a personal or corporate relationship with a supplier may be reasonable in the interests of the parties, such as where the beneficiary of the restraint has a legitimate interest to protect, analogous to goodwill, as something which adds value to the business: Trego v Hunt [1896] AC 7; Muller & Co’s Margarine Ltd v Inland Revenue Commissioners (1901) AC 217; Box v The Commissioner of Taxation (1952) 86 CLR 387; [1952] HCA 61; Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42; Tank Lining Corporation v Dunlop Industrial Ltd (1982) 140 DLR (3d) 659; Vandervell Products Ltd v McLeod [1957] RPC 185; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, referred to.
8. The restraint did not protect a legitimate interest and was therefore unreasonable as between the parties.
9. In dealing with public policy considerations, it may be appropriate to have regard to the provisions of the Competition and Consumer Act 2010 (Cth): Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45, referred to.
10. Irrespective of whether the Agreement was unreasonable as between the parties, it was unreasonable in the public interest and also void for that reason.

From a practical and commercial perspective, restraint clauses can be a delicate balancing of each party’s respective interests.

However-any attempts to restrict a commercial activity should be treated cautiously and carefully and all of the relevant factors examined to ensure that the restraint terms are reasonable and enforceable.

The loss of such rights can have a significant consequences in terms of loss of market share, and revenues.

The cost of obtaining sound legal advice and careful drafting to cover these issues will be money well spent to minimise any risk of a successful challenge to the restraint provisions.

Call our Brisbane Lawyers on (07) 3009 8444 or our Sydney Lawyers on (02) 9307 8900.

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